Tax bill sows confusion for nonprofit hospitals

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Dive Brief:

The $1.5 trillion tax cut bill passed late last year is bringing a windfall of money to many healthcare companies, but there's also an equal amount of confusion, reported the Wall Street Journal.

The newspaper gave the example of Banner Health, which employed 11 people earning more than $1 million in 2015. The new tax structure will require Banner to owe tax on only five of those high earners, while other large nonprofits may face more taxes on similar employees.

The issue involves how nonprofit hospitals are structured. More specifically, a nonprofit will pay a 21% tax on pay of more than $1 million, but will only owe that tax level on the five highest-paid employees at each entity registered with the IRS.

Dive Insight:

The analysis of Banner Health and other systems, like Trinity Health, are a cautionary tale that the tax legislation passed at the end of 2017 continues to confuse and confound health systems.

Nonprofit hospitals paying million-dollar salaries are met with suspicion with people questioning how a nonprofit entity — especially one in healthcare — can offer such high salaries. Of course, nonprofits must prove a community benefit to maintain their tax-exempt status, but that doesn't stop some wondering how a nonprofit can pay so much and rake in hefty revenues.

Nonprofit hospital advocates argue that the community benefits more than outweigh salaries and profits. The American Hospital Association recently released an analysis that said hospital community initiatives outweighed the value of tax exemption 11 to one.

Critics say the rules are so lax hospitals can tout promotional events as a community benefit.

Meanwhile, nonprofit hospitals are doing well on Wall Street. A recent report showed that the largest nonprofit hospital systems gained more than $21 billion in 2017 through Wall Street investments, stocks, bonds, mergers and acquisitions. The Axios analysis found that 84 of the largest nonprofit hospitals systems showed total revenue of $535.5 billion and $14.4 billion in profit.

The frustration on the nonprofit tax front stands in contrast to for-profit healthcare organizations celebrating a lower corporate tax rate. During fourth-quarter earnings calls over the past week, healthcare organizations talked about how they would invest the windfall of millions of dollars. Humana said the payer expects $550 million annually from the tax cuts. The company will spend the money this year to increase wages to at least $15 per hour, create an incentive bonus program for the 28,000 employees who don’t have that benefit and accelerate investments in areas like technology and analytics.

Meanwhile, Cigna said it expects $150 million in savings it will use to invest in innovations, raises for employees and to "return money back to the marketplace" by furthering community initiatives.